Paul Graham’s Economic Theory, Short Version (Part 1)

Paul Graham (not related to me as far as I know) has written a few excellent essays about wealth creation and distribution. While I don’t agree 100% with everything in them, I think they are great food for thought and here I will try to distill them to their core economic messages (less focus on startup tips). I will be brief since there’s no point in writing something that is as long as the original essays.

I am basing all of this on his two main essays on wealth, How to Make Wealth and Mind the Gap. I encourage you to read them in full, this is not a substitute for the whole thing.

How to Make Wealth

Paul Graham writes about making Money via Wealth creation:

This essay is about how to make money by creating wealth and getting paid for it. […] There are plenty of other ways to get money, including chance, speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft, lobbying, counterfeiting, and prospecting.

The advantage of creating wealth, as a way to get rich, is not just that it’s more legitimate (many of the other methods are now illegal) but that it’s more straightforward. You just have to do something people want.

So Wealth is created by making something people want (it doesn’t have to be a physical object).

Productivity

Time * Productivity = X Quantity of Wealth (and usually Money)

Since Time is the same for everybody, the best way to increase X is to be more Productive. For example, it’s possible in a startup context to generate as much wealth in 4 year as a less productive person would generate in 40 years.

Here are some factors that influence productivity:

Negative/Positive

  • Being interrupted / Working without interruption
  • Limited by job description / Can use all your skills
  • Bureaucracy (meetings, middle-managers, etc) / Get things done without significant drag
  • Large group of people with various levels of competence / Small group of smart people
  • No significant monetary incentives / Large and proportional monetary incentives

Important to remember:

Startups are not magic. They don’t change the laws of wealth creation. They just represent a point at the far end of the curve. There is a conservation law at work here: if you want to make a million dollars, you have to endure a million dollars’ worth of pain. […]

It’s not a good idea to use famous rich people as examples, because the press only write about the very richest, and these tend to be outliers. Bill Gates is a smart, determined, and hardworking man, but you need more than that to make as much money as he has. You also need to be very lucky.

The Amount of Wealth in the World is not Fixed

Here Money must not be confused with Wealth.

At any one point, there might be a fixed amount of Money in a family’s bank account or a fixed amount of tax revenue during a certain year for a government, but that money is just a mean to move Wealth around. It is possible for anyone to create more Wealth: If you work to Create or Improve something, the world is now richer by that thing and nothing was taken away from anyone. The pie just got larger.

Not Everybody Creates Wealth at the Same Rate

This anecdote is so good that I won’t try to summarize it:

there are huge variations in the rate at which wealth is created. At Viaweb we had one programmer who was a sort of monster of productivity. I remember watching what he did one long day and estimating that he had added several hundred thousand dollars to the market value of the company. A great programmer, on a roll, could create a million dollars worth of wealth in a couple weeks. A mediocre programmer over the same period will generate zero or even negative wealth (e.g. by introducing bugs).

How to Become Rich

You need to be in a position where you have both Measurement and Leverage.

Measurement means that your Productivity is truly measured and not just averaged with everybody else’s (like in a big corporation where you can expect a fairly predictable salary as long as you are not incompetent, and where extra effort is not always fairly rewarded, or even noticed).

Leverage means that your decisions can have a big impact, which means that you can be responsible for more gain if things work out well, or more losses if they don’t.

Why Wealth had a Bad Reputation

Making wealth is not the only way to get rich. For most of human history it has not even been the most common. Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation.

So in Short…

You have to create lots of Wealth, which you can usually exchange for Money, by being very Productive in an environment where your performance is Measured and where you have the Leverage necessary to make a difference. All of that without taking anything away from anybody.

That’s it. The original essay can be found here.

Stay tuned for Part 2 based on Mind the Gap.

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